Once the papers are signed and the deal is closed, the new owners of the Paris Opera House are told, "You may hear of a ghost, a Phantom of the Opera." Of course, they dismiss such talk as superstition, but those who work in the Opera House know better.
When the ballerinas and Papillon see the shadow of a cloaked figure glide eerily across the walls of the backstage area, they go straight to Joseph Buquet who has seen the Phantom. Buquet readily gives them a description of a ghastly figure with sunken eyes, yellow skin and no nose.
The mother of diva Carlotta barges angrily into the new owners' office letting them know in no uncertain terms that her daughter will not be intimidated and will perform on Wednesday. The cause of her anger is a note ordering Carlotta not to sing and signed by "The Phantom." The note says Christine Daaé should perform in her place. For some unknown reason, Carlotta is "strangely ill" on Wednesday, and Christine does, indeed, perform.
After the performance, Christine's lover, Raoul, stands outside her dressing room door and overhears a strange voice speaking to Christine ordering her to only do the will of her master to which she agrees.
A note seems to appear from nowhere on the owners' desk stating that Christine must be used in the next performance or Faust will be performed "in a house with a curse on it." The warning is not heeded, and Carlotta does the performance. However, in the midst of the performance, the huge chandelier in the Opera House falls on the audience causing pandemonium.
Raoul goes to Christine's room and hides. He hears Christine come in and the same strange voice say he has come for her. A mirror moves aside in her room revealing a hidden doorway through which Christine enters. She is met by a strange man in a mask, and, although she is at first repelled, she reluctantly allows him to escort her down several levels of the catacombs under the Opera House to his chambers.
He tells her he has brought her there because of his love for her. She tries to run, but there is nowhere to go. He tells her he was once known as Erik, but he has lived nameless in these cellars because of man's hatred. She realizes this is the Phantom and faints.
When she awakes the next morning, she is in an elaborate bedroom. A wedding dress is laid out for her as well as several pairs of shoes. A note from Erik tells her she is in no peril as long as she doesn't touch his mask.
She walks out into his chambers where he sits playing his organ. As she watches him, the urge is too great, and she reaches around from behind him and removes the mask. When he turns and she sees his face, she is horrified and falls to the floor. Filled with anger, Erik grabs her by the hair and growls, "Feast your eyes - glut your soul on my accursed ugliness!"
She begs him to let her go saying she will be his slave forever. He agrees, but warns if she ever sees her lover again, it will be death for both of them.
Once back in the Opera House, Christine sends a note to Raoul saying she must see him at the Bal Masque. Thinking their disguises will hide them at this masked ball, they meet on the rooftop, but Erik sees them and overhears their plans to run away after Christine's next performance.
The next night Raoul has a carriage waiting outside, and Christine begins her performance. However, in the middle of the performance, the Opera House lights go out momentarily, and when they come back on, Christine is gone.
Raoul knows the Phantom has taken her and goes to her dressing room. He encounters a strange man whom he has seen many times lurking about the Opera House. However, this turns out to be Ledoux of the Secret Police. He shows Raoul how to enter the catacombs, and they both begin their search into the cellars below the Opera House for Christine and the Phantom.
Soon, Raoul and Ledoux get very near the Erik's chambers, but they stumble into the room of many mirrors, an ancient torture chamber. Erik discovers them, eliminates any means of escape, and turns on a source of heat in the room which will gradually get hotter and hotter until they die. They accidentally find a trap door in the floor which allows them to escape into another room. However, Erik has not been outwitted yet. He closes a gate on the room so they cannot escape and turns on a rush of water which is mean to drown them. Christine pleads for her lover's life, and Erik eventually relents. He opens two trap doors in the floor which allow them to come into his chambers, wet and exhausted.
During this time, however, a mob has found their way into the cellars and has located Erik's chambers. He grabs Christine and escapes through a secret door. Running from the Opera House into the Paris streets, Erik steals the very carriage Raoul had waiting and drives it wildly through the streets with Christine inside. The mob pours into the streets and chases after them. Christine manages to jump out of the carriage just before Erik overturns it. While Raoul comes to Christine's rescue, Erik runs to the river's edge with the mob in close pursuit. With nowhere to go, the mob closes in and kills him.